of corporate law. That sounds like the old argument that the banking commissioner really should be a banker or the insurance commissioner really should be an insurance man.

I hope that is not your argument.

Mr. HESSEN. No. I don't think I said anything that would lead you to that inference.

Senator DURKIN. I just wanted your reference for the established precedents, the established traditions.

Mr. HESSEN. It is not a defense of the status quo and it is certainly not ancestor worship on my part. I believe it is very valuable for people to have a body of law which prevails, thus enabling them to know exactly as either shareholders, officers or directors what they can and cannot do.

Let me come at this question in a different way. If it were the case that Delaware law, or State corporation laws in general, wrongly favored corporate officers at the expense of shareholders, and if Delaware were even worse than all the rest and therefore Delaware law was most inimical to shareholders, then one should be able to find some evidence for that.

If companies are thinking of transferring from other States to Delaware, which is allegedy more permissive and enabling, you would certainly expect to see a shareholder's exodus because they would realize corporate managers are going to have increasingly unconstrained powers to do what they like. But one sees no evidence being offered, even though data on share ownership is available. The accusation is made against Delaware, but the critics, like Nader, do not document in any way that there has been a shareholder exodus.

Čertainly small investors would not bother to sell their shares because what they would lose is minimal, but if pension funds and other major shareholders thought their interest as shareholders were to be diminished by a corporation's transfer from one State to another, they would sell out.

And, simultaneously you would expect the corporate officers to take advantage of the exodus by selling short, expecting the stock to go down, or selling their shares and expecting to buy back later at a lower price.

None of this has occurred, nor can it be documented.

I am defending a law which provides a high degree of certainty and predictability, and thus is mutually beneficial to all parties.

Senator DURKIN. There is an issue of nonshareholder protection, too. Mr. HESSEN. Well, the problem with the Federal chartering proposal is that it is a panacea-it intends to do something about everything. Some of the advocates of Federal chartering like Prof. Donald Schwartz of Georgetown Law Center says there is really nothing that needs to be done for shareholders. They are essentially taken care of by the stockmarket and existing SEC rules against fraud and misrepresentation.

It is not clear precisely what has to be done for shareholders because there is no victim. Presumably a crime requires a victim.

I can find no evidence beyond accusations that shareholders have been wrongfully deprived of anything. If they have, it is hard to explain why shareholders go on investing money in corporations large

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and small, why there is not a selloff, switching their money into banks or corporate bonds which are more secure.

Who is the group for whom Ralph Nader is speaking, or does he invent these people

Senator DURKIN. Yes, but I think we ought to set the record straight. We are not here today to explore Ralph Nader. We are here to explore the straw men who-straw men are always handy but they don't add much to the weight of the information.

But in your view, should there be any-let me back up.

Where, in your view, does the corporation get its right to operate? Does the State have any role? What happened to the view that the people gave power to the State and the State gave the power to the corporation? Has that been left in the dust?

Mr. HESSEN. I don't see how you can say the people have given the right to the State to give the right to corporations. My view is not that the State is the creator and the corporation is the recipient. A corporation is an organization, simply a label, which denotes a group of individuals banded together in a contractural relationship. Their rights to join in a corporation as investors or managers are the rights they possess as individuals. They form together into a voluntary contractual association. The role of the State is to adjudicate any disputes that might arise when corporations are formed and decide who is right. Those decisions become the precedents which become available for future participants. They can accept those precedents as binding on them or if they wish they can strike out the precedent by saying, "We prefer some other solution. We specifically stipulate some other alternative than the one which is currently the precedent."

The State exists to adjudicate disputes so people don't have to be hermits on the one hand, or fight out battles on the other.

Senator DURKIN. So, I gather you have rejected the theory that we were taught in law school that the people provided the power to the sovereign and, it being the State there in the case and the State provided or gave the right to the corporation. I realize that the Supreme Court has expanded the right to assembly and some of the first amendment rights, but I don't-do you have any decisions where there is a right of freedom of association for business purposes? I mean that seems to be the thrust of your argument.

Mr. HESSEN. That is exactly the thrust of my argument. People have the right to combine for any peaceful purpose without having to justify their behavior to anybody else, either the Government or the people at large or any representatives of the people. As long as you are not wronging anybody else, you have the right to combine with others for any purpose, educational, philanthropic, economic, or other. I don't believe in a hierarchy of rights: that if you want to combine to form a school, you can, but if you want to form a business, you can't without permission. I believe individuals have a right to do whatever they like, alone or in voluntary cooperation with others, for any peaceful purpose, and that the State has no right to monitor, or restrict or tell them the form of their contractual arrangement.

I might say, this is not a terribly radical view. It was a view held by the Founding Fathers. The view that the State is the sovereign is precisely the view that the Founding Fathers attempted to overturn. They

were fighting against Kings Henry VIII, James I, Charles I, James II, and George III who held the sovereign must grant permission to the citizens to combine. They said no. People have a right to combine for any peaceful purpose.

I am not advancing a view which is wholly unorthodox.

Senator DURKIN. Do you think then the Government has any corporate oversight responsibilities justified in any corporate oversight? Mr. HESSEN. Well, Mr. Chairman, my answer is that the Government has the same responsibility for oversight in regard to all forms of business enterprise (sole proprietorships, partnerships, syndicates, or corporations) and regardless of size. That is, no business of any size or any legal form, partnership, corporation or any other, has the right to do anything which the individual members wouldn't have the right to do.

My view is that you don't gain any new rights or any entitlement to do anything which you didn't have as an individual. That is, if you couldn't pollute your neighbor's lawn, if you couldn't drop carcasses on your neighbor's lawn if you were a butcher, then if you become a corporation you don't acquire the right to pollute your neighbor's lawn by dropping carcasses. Rights don't change when you are a member of an organization or corporation. You can't do any more or any less.

The State has the same essential function in all cases, which is to protect the rights of individuals in their contractual relationships and prevent outsiders or third parties from harming them.

But it is not a question of what the legal form of the business is, corporation or otherwise, nor of the size. I can find no basis whatsoever for saying that suddenly when a corporation achieves $250 million of sales, or has more than 10,000 employees, or more than 2,000 shareholders on a major national stock exchange, it somehow becomes a creature of the State and is made to forfeit its right to be presumed to be innocent of wrongdoing until proven guilty.

Every business of every size and every type, should be subject to exactly the same rules against wrongs done to third parties and held to the strict enforcement of contractual commitments among the various members to each other, but it is not a special problem related to corporations or to size.

Senator DURKIN. So as far as their internal activities, are you saying that the Government really has no oversight responsibility?

Mr. HESSEN. In regard to the internal activities I would say the Government has no more right or need to supervise the internal affairs of the corporation than it does to supervise church or university or charitable foundation or any other association. All these organizations are voluntary, they don't conscript members, they don't expropriate or seize wealth to be founded or sustain themselves. Presumably all the people who are participants in any capacity are there by their voluntary judgment and choice. It is not the place of the Government, State, or national, to dictate either the form or content of contractual relationships.

Senator DURKIN. What about the problem of bribery, air pollution, water pollution, illegal political contributions? How do we deal with those questions?

Mr. HESSEN. Good question.

Mr. Chairman, none of these questions are unique to the giant 700 corporations. Pollution or bribery are already covered by existing Federal laws or could be covered by Federal laws. What the advocates of Federal chartering have not shown is that Federal chartering is needed. There is existing legislation. Christopher Stone has said, "Anything that can be done by federal chartering is already covered by federal law."

What the advocates of Federal chartering have not been able to demonstrate is that there is any need for it, that it is not superfluous, redundant, and therefore unnecessary.

No one wants to condone any wrongs, but there are already Federal laws that cover these wrongs and therefore no need for a new body of law.

Senator DURKIN. A lot of people said there has been a growth in the Federal bureaucracy, which is related to attempts to impose regulations and conduct on corporations, oversee corporations, do I understand that it would be your argument then that we should scrap those Federal agencies and let the corporations tend to this internally themselves?

Mr. HESSEN. Scrap which Federal agencies, sir?

Senator DURKIN. Well, take OSHA, for example, Occupational Safety and Health. Is that a responsibility of the corporation itself? Or is that a responsibility of a Government oversight? The pollution. Bribery. It appears-there appears to be an inconsistency. There are plenty of laws now and you shouldn't go to any Federal chartering route. We should rely on the laws themselves.

Mr. HESSEN. The purpose of the laws is to prevent various crimes or tort wrongs against third parties. If these laws exist and if they are not contradictory in the sense of providing impossible standards that can't be attained or if it isn't the case of two different agencies issuing contradictory rules so the companies don't know which ones to follow, then the companies can be asked to obey the laws.

Please don't misunderstand. I am not saying that corporations are incapable of doing wrongs. What I am saying is they should not be held to any different standard of accountability, because of size or because of being corporations. The same laws should apply to everyone, regardless of the legal form of the organization or the size of the venture. To hold that the 700 companies are presumed to be guilty, until they can establish their innocence, and to give everybody else the opposite and traditional and proper presumption of being innocent until proven guilty strikes me as an impossible double standard to maintain or justify.

I don't ask any more for corporations than I would ask for proprietorships or hermits, namely, to be considered innocent until proven guilty, to be held to the same kind of laws and standards of accountability as any other kind of group.

Senator DURKIN. Let's take, the early 1970's, the small stockholder, shareholder, small investor, suppose he had left the stock market. Why do you think that happened? Is than an expression of dissatisfaction or what?

Mr. HESSEN. I gather the reason for it is a great many people dis

covered that given the state of the economy and the unpredictability of the market, they could do better in bonds.

I was one of the small shareholders who left the market because there was a time when the rate being paid on bonds was considerably more attractive than the stock market. That had nothing to do with the question of corporate officers having prerogatives to harm shareholders or being able to divert corporate profits from the shareholders to their own pockets. It was the state of the economy which made others like me run for cover, but not any issue unique to the 700 corporations or even to the top 7,000.

Senator DURKIN. If you take the Equity Funding scandal, that was out in your neck of the woods. How do you protect those people?

Mr. HESSEN. If Government exercises a supervisory role over the stock market or insurance companies or other form of venture, I believe that it creates an illusion of protection. One assumes, well, the Government has inspectors and auditors in the field, so people would tend to become less wary and cautious. They assume if this area is controlled or inspected by Government, well, presumably they are doing their job and therefore, no kind of wrongdoing is going on undetected. If people know that the Government is regularly auditing insurance companies or banks or any other financial intermediaries or other firms, they assume there is no reason to investigate for themselves.

I think the primary effect of the Government supervision is to create an illusion of safety, an illusion of protection. I cannot find that there has been any demonstrated benefit to investors from the existence of these regulatory agencies. There have been studies attempting to compare the rate of return to shareholders before the SEC was enacted with the rate of return after the SEC was enacted, and there is no demonstrable difference.

People tend to think this kind of agency does protect us. I will give you an example close to what you were driving at. The food inspector for the Food and Drug Administration (FDA) visited the Bon Vivant Soup Co. the day before the soup containing the botulism was produced. Government inspectors simply cannot possibly account for every contingency; they can't possibly anticipate or prevent every kind of wrong that can occur.

You punish when wrong is discovered. You don't assume there is going to be wrongdoing simply because you are dealing with a giant corporation.

Senator DURKIN. Well, are you advocating that the SEC disband? Mr. HESSEN. Perhaps "phased out" would be a

Senator DURKIN. Any others you would like to add to that list? Mr. HESSEN. I certainly would add the Federal regulatory agencies which have had the effect of creating price cartels, like the CAB and ICC. I don't think anybody, except the members of the Commissions, think they are doing anything beneficial for the public. It is not an unorthodox opinion anymore to say the CAB and ICC are unnecessary. Senator DURKIN. Let me pursue that. Do away with them. Just put a sign down there

Mr. HESSEN. Yes.

Senator DURKIN. How about the FTC? How about the antitrust activities?